There’s no getting around it…high inflation is having an impact on small businesses. The historic average rate of inflation is between 2% and 3%. Since June of this year, it’s been over 5%; the rate in October was 6.22%.
Inflation is caused by a number of factors, including supply chain issues driving up prices due to higher demand that can’t be met because of shortages, labor shortages triggering higher wages which usually is passed on to consumers in the form of higher prices for goods and services, and perhaps most importantly, runaway government spending putting huge amounts of dollars into circulation that requires an increased money supply from the Federal Reserve. Shortly before the spike in inflation in the past couple of months, I suggested 5 ways inflation could impact your business. Now we know.
What does all this mean for your business now and what can you do about it?
How is inflation impacting small businesses
According to Business.org, 60% of small-business owners are concerned about the financial health of their business because of inflation. What’s more, 47% of businesses report their profit margin decreasing due to inflation since the beginning of the pandemic. Some have taken action, with 89% of small business owners increasing their prices to counter inflation. Unfortunately, 37% of customers are complaining about increased prices.
What you can do about inflation
You can do nothing and hope that inflation will subside. Waiting out this inflationary period may not be the best course of action with economists suggesting that inflation will persist, at least well into next year. The International Monetary Fund expects inflation to return to about 2.2% by the middle of 2022. A better option is to take action now. Here are some ideas:
- Raise prices. Often small businesses are loathe to raise prices for fear that customers will abandon them. That fear may be well founded. Business.org said 37% of customers have complained about higher prices.
- Handle debt. Now is not the time to borrow more money. While interest rates are still relatively low, it’s likely they’ll creep up as inflation persists. Those with existing lines of credit may want to pay them down if possible.
- Cut your overhead. Doing this will help you minimize or avoid the need to raise prices while maintaining your profit margin. There are numerous ways to do this, including better managing inventory, using technology to improve efficiencies, and working with your CPA or other financial adviser to find personalized ways to reduce your expenses.
To repeat what President Ronald Reagan said:
“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”
On a personal note, I remember very well the double digit inflation of the 70s and 80s (e.g., 11.22% in 1979, 13.58% in 1980, and 10.35% in 1981). I had a 15.3% mortgage when I bought my home in 1981. As inflation subsided, I refinanced to 9.8%, and then again to 8%. Eventually, the rate of inflation returned to historic levels. The point: inflation will eventually subside and businesses will readjust when it returns to more normal levels. But you don’t have to sit by and wait; you can take action now.